Shares in Aim-traded records management and damp proofing group Restore have rocketed 129 per cent in the past 12 months, as investors have responded positively to the turnaround under chief executive Charles Skinner. There should be further gains as the group uses its strengthened finances to roll out its simple but effective business model.
A £4.6m share placing in July bolstered the balance sheet. Combined with agreeing a £16.5m borrowing facility with Barclays, this means the Restore's bosses are in a strong position to make the bolt-on acquisitions that are so important for its records management side.
The records management business is key: it produced 40 per cent of group revenue in the first half of 2011, but 89 per cent of operating profits. Records management has some attractive characteristics. It's highly resilient, with client retention rates of over 90 per cent and its costs are largely fixed. True, it's hardly a growth industry, although management claimed organic growth rates of 5 per cent in the first half. However, the potential to grow by acquisition is considerable, as shown in the first half when the first-time inclusion of Datacare and Formsafe - acquisitions made in 2010 - led to a 24 per cent rise in divisional revenue on the previous first half. This growth also shifted the mix towards the area where profit margins are highest - in the first half records management produced a 38 per cent return on sales, helping Restore's overall operating margin to widen by three percentage points to 13 per cent.
RESTORE (RST) | ||||
|---|---|---|---|---|
| ORD PRICE: | 65p | MARKET VALUE: | £29.9m | |
| TOUCH: | 64-65p | 12-MONTH HIGH: | 76p | LOW: 27p |
| DIVIDEND YIELD: | nil | PE RATIO: | 8 | |
| NET ASSET VALUE: | 36p | NET DEBT: | see text | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 31.5 | -3.9 | na | nil |
| 2009 | 27.0 | -7.8 | na | nil |
| 2010 | 27.7 | 0.7 | 3.1 | nil |
| 2011* | 34.4 | 4.6 | 6.8 | nil |
| 2012* | 38.5 | 5.8 | 8.1 | nil |
| % change | +12 | +26 | +19 | - |
Normal market size: 1,500 Market makers: 7 Beta: 1.0 *Cenkos Securities estimates (profits and earnings are not comparable with historic figures) | ||||
The other major revenue contribution comes from Peter Cox, a damp-treatment and timber proofing business. In the first half it made 45 per cent of revenue, but only 2 per cent of operating profit. The business is highly cyclical and needs lots of house sales to flourish. However, Restore says costs are under control, and Peter Cox can be run profitably in today's depressed UK housing market. Besides, after implementing new sales plans, management is hoping for an upturn in the third quarter.
Restore's bosses are keen for the company to pay dividends. First, however, a capital restructuring is needed to remove retained losses from reserves and that requires High Court approval. A key decision is expected on 5 October.
That leaves just one elephant in the room: the 56 per cent shareholding of Geraldton, a company owned by businessman and former deputy chairman of the Conservative Party Lord Ashcroft. This create risks; not just because Lord Ashcroft is not everyone's cup of tea but because he effectively controls the company.
